What to expect in getting a bank to finance a pretty-good house
After reading the musings of Holladay, Dorsett, Chulpp, Lstirubek, and Risinger on green building for the past six months, I spoke at length with a builder this week. When I discussed exterior foam and ductless mini splits, his very professional and polite response was: “The bank’s not going to want finance that.” (To be clear, the builder did not simply throw me under the bus. He indicated that he has had some luck in convincing banks to finance unusual projects.) I live in a rural county 50 miles from the nearest urban area where anyone might be pursuing a pretty-good-house project.
What experiences have other people had with financing? What should I expect? How should I prepare? Has anyone had a bank say: “We are not financing a new house with a non-standard HVAC system”?
My crazy ideas (that I’ve disclosed to the builder) are four inches of exterior foam and using two ductless minisplits to heat and cool 1,800 square feet, instead of a standard forced-air HVAC system.
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James,
I don't know if this experience is relevant, but my neighbors had no problems getting a local bank to finance a mortgage for an off-grid house. Electricity is provided by a PV array, batteries, and a gas-powered generator.
I'd Install some cheap electric resistance heating for the bank. I had to change homeowners insurance companies because the one I had (based here in Maine no less!) refused to believe that my two minisplits could possibly heat my PGH, even when I pointed out the R-42 walls and R-70 ceiling.
They'd be fine with an unvented kerosene heater or a wood stove, both of which increase the chance of a fire claim by about a million per cent.
In MA people can get 0% loans for ductless heating systems subsidized by the state if they have a Manual-J that shows it'll cover the heating load at the 99% outside design temps, and the efficiency of the HSPF and SEER of the equipment meets some none-too-strict efficiency requirements, which also gets a cash rebate subsidy. No backup heating systems required. I've walked people through that state-subsidized loan situation multiple times without a hitch, some retrofit (with pre-existing heating systems functional or not) but very recently on a new construction addition that doubled the size of the house, replacing the system on the older portion with a 3-zone multi-split with a similar solution on the addition. It's unlikely that the banks would be pickier about heating system requirements than state subsidized programs, but maybe.
I've never heard of banks balking at going with higher than code minimum on the building envelope, as long as the market value of the property was sufficient for meeting their underwriting rules on the amount loaned, but I don't have any direct experience negotiating with loan officers at banks, not sure if a 4" foam-over would cause them to balk or not. I suspect the foam would be an unimportant detail- they would care more about whether or not it met code, and that the heating system could meet code on capacity, which is something you can usually demonstrate with a Manual-J. The key sticking point with a ductless system might be the room loads of rooms doored off from where the ductless head is located. (A mini-duct cassette system might be an easier sell, if that comes up.)
On a DER I was involved with a few years ago that put ~4" of foam on the exterior of an antique house there was no mention of having to jump through hoops for the banks, but there was plenty of paper-shuffle to collect the (quite substantial) rebate money through the utility run program that had funding for DERs:
https://www1.nationalgridus.com/DeepEnergyRetrofit-MA-RES?ng=us
That was a three story house with one ductless head per floor. There's still some archived local press bits about that project lurking on the web- nothing very in-depth:
http://worcestermag.com/2013/04/08/1890-worcester-home-undergoes-deep-energy-retrofit-201984871/10919
https://www.wpi.edu/about/sustainability/164223.htm
Mostly, it is a question of loan amount as a percentage of appraised value. Our appraisal was based on plans and the contract terms with the builder. I don't think the appraiser gave much credit for the energy efficiency things we did, but they didn't hurt. Neither the plans nor the contract indicated the type of HVAC. The contract simply had an allowance for HVAC.
The main problem we had with financing was that our house has an attached airplane hangar. Since the appraisal was not based on sufficiently similar homes, the bank could not resell the loan.
James,
i've never had a bank look that closely at those types of details. As Reid said, they want to be confident they can get their money back if things go south. How does it stack-up with nearby comparables seems to be their main concern, and so far, around here anyway, they don't add or take away value for efficiency.
I can't imagine a bank saying anything like that. As stated above, the bank is only concerned about the loan to value ratio. As long as the loan is less than 80% the appraised value, you should be fine with decent credit and income. There are, of course, ways to go higher than 80% loan to value, but you will pay for it one way or another... in rate or points. Do remember that appraisers may be very narrow-minded in what they value (they reflect the market, after all). You will not likely get credit for ANY investments you make toward being green/efficient. They care about square footage, finishes and amenities. For this reason, they may also penalize the smaller homes (think 2 bedrooms or less) more than larger homes as there may be less mainstream appeal. That doesn't mean they would reject a loan for these features, just that you may need to increase the size of your down payment to cover them. Just my $0.02.
The above three comments are on the money so to speak. Banks like to safely invest their loan dollars and they want to be able to collateralize their debt safely and with a property they can resell. They are looking for you to have major skin in the game, too. Eighty percent or less of the appraised value will they finance. They use an appraiser who determines what the property will be on the market. The question isn't how much insulation you have, it is how much will it increase the value of your home. If you spend 15k on insulation but the property is not worth 15k more, that is not a problem for the banker as long as you have a home that appraised well. Square footage, the number of bedrooms, number of baths, garage doors, finishes (wood floors, crown molding, stone tile, wainscoting), amenities (granite counters and fancy kitchen etc.) lot size, quality of water well, electrical service, and so on, will be evaluated. But mostly in the above order- to determine what the house will go for on the open market. I suspect that the issue most of us would face is this: it is extremely difficult to APPRAISE and build a high quality home or PGH is terms of efficiency and amenities if the home is not large, essentially because the per square foot cost of these things is high. It might cost you $500,000 to build a single story PGH that is a 1800sf 3 bedroom structure with a detached two car garage. It might cost you $600,000 to build a TWO STORY 3,500sf 5 bedroom home with an attached three car garage. Which one sells for more on the market? A LOT MORE... ???? So getting eighty percent of the $500,000 is harder than getting 80% of the $600,000 when you look at the this comparison. It is just very cost inefficient to build a smaller home in terms of per square foot cost.
Ryan
Appraisers have to follow uniform standards of professional practice or USPAP. That is the frame work for what an appraiser must do to complete an appraisal to be in compliance. I wouldnt call an appraiser narrow minded but rather say the appraiser is limited in what can be construed as a valid appraisal.
Appraisers measure market value, that is they look at sales data and report what the market is doing. You have to go the heart of the matter and the definition of market value. Part of the definition is that to be a valid comparable sale a home must have been exposed to the market. Cost does not equal value so you cant look to cost of building a home if it was never listed for sale.
What you will see is that most if not all very energy efficient homes are custom built and have never been on the market. So how is the appraiser going to have data in an emerging market.
Another problem is there is not a uniform set a criteria defining an ee house. There are dbl stud wall, spray foam, exterior form, PV etc. How do you really know how a house is going to perform. It makes if difficult for a buy to know how much to pay and for an appraiser to ferret out all the differences.
Then there is numerous problems affecting the appraisal profession.The big lenders have driven down the fees and put so many stipulations on the appraisers that it leaves the field with inexperienced and unqualified appraisers. Who wants to take on a complex assignment when the banks wont pay you any more than the track homes that only take a few hours to complete.
Any value that is not supported by market data and sound appraisal practices is ripe for fraud,
The tide is turning as lenders see a growing market and work with appraisal organizations to come up with valuation tools. Your best bet is to search out lenders who have experience with ee homes and have appraisers that have experience in valuing ee homes.
I have 15 yrs in home finance and some of that involved home construction. The only issue you might have is finding relevant comparable sales with which to base your appraised value. If it's difficult you may have to put more money into the project. You may also require a slightly higher reserve for cost overruns. Simple things like rain screens, and exterior foam I wouldn't get too worried about.
Just a FYI. Some GSE's (ie Fannie Mae) have an Energy Improvement program for existing properties. A HERS report is required.
Did you attempt to identify a bank which writes Energy Efficiency Mortgages ? They usually write up to 125% of appraised . based on predicted energy savings and the fact you should be more liquid to pay them .
Just as an FYI, the Appraisal Institute now has guidelines for conducting green appraisals.
http://nationalmortgageprofessional.com/news/56670/new-appraisal-guidance-addresses-green-housing
OH, and part of getting the decent appraisal numbers by which the bank will finance the loan (I failed to mention in my post) there is that old maxim about "location, location, location." The school district and local comparable home value is something that helps you case or hurts it. Building an energy efficient home in the poorest neighborhood filled with run down trailers doesn't help get your value estimated favorably. Good luck.
Thanks everyone!